New “Commonwealth” Pitch to Cut U.S. Taxation of Companies from the States

Posted May 30, 2014

Key ‘commonwealthers’ have launched another initiative to cut Federal taxes on income that companies in the States receive from manufacturing in Puerto Rico.

They are saying that the territory should have a tax advantage over foreign countries as a location for manufacturing. But they are not explaining that they are also seeking a tax advantage over the States and to make Puerto Rico the cheapest location in the world tax-wise for manufacturing.

They are, additionally, rewriting the history of the tax breaks for manufacturing in the territory that Congress sunset in 1996 and ignoring other Federal actions to help the territory economically.

Yesterday, the head of Governor Alejandro Garcia Padilla’s offices in the States and the office head’s father, a previous “Commonwealth” party governor, called for Congress to replace the repealed tax reductions.

The chief of the Government of Puerto Rico’s industrial promotion agency also said that this should be done in a reform of the Federal tax system being seriously discussed in the Federal government. “The current discussions … provide the perfect opportunity,” the head of the Governor’s offices in the States similarly said.

The reform would tax profits that companies based in the States gain from manufacturing in other places using patents and trademarks developed in the States that account for much of the value of the products of the manufacturing.

Companies and the Garcia Padilla Administration, however, recently unsuccessfully sought to have reform plans by the chairmen of the Congress’ tax law committees exempt income from Puerto Rico from the new taxation.

Puerto Rico Federal Affairs Administration (PRFAA) Director Juan Hernandez and his father, former Governor Rafael Hernandez Colon, made the calls on Congress separately but used similar arguments. The younger Hernandez wrote a blog post on the Website of a Capitol Hill newspaper. His father issued a statement in in the territory. Puerto Rico Industrial Development Company (PRIDCO) Executive Director Antonio Medina spoke at a briefing on Puerto Rico’s economic situation in a congressional office building.

PRFAA Director Hernandez asserted that it is Congress’ “responsibility” to restore tax breaks for manufacturing in the territory instead of other places. Former Governor Hernandez contended it was time for Congress to again provide a special tax benefit for companies that manufacture in Puerto Rico, saying that Congress had not taken significant action to benefit the Commonwealth’s “political economy” in nearly 20 years.

He overlooked that Congress has repeatedly acted to enable companies in the States to exclude nine percent of their income from production in Puerto Rico from taxation. This is estimated to represent $3.7 billion a year in production in the territory. The Federal government has also increased funding for the territory in health, education and other programs by billions of dollars a year that circulate in the territory’s economy — although the territory still receives far less than it would as a State.

All three commonwealthers claimed that Puerto Rico’s failing economy was largely caused by the end of Federal Internal Revenue Code Section 936 legislated that nearly 20 years ago. The provision had enabled companies in the States to reduce taxes on income attributed to the territory.

None noted that insular economic growth had also lagged growth in the States when 936 was in effect — as did Puerto Rico’s representative to the Federal government, Resident Commissioner in the U.S. House of Representatives Pedro Pierluisi (D) and former Governor Luis Fortuno, both of the statehood party, in the same congressional briefing at which Medina spoke.

Nor did the commonwealthers recognize the other causes of Puerto Rico’s economic decline that Fortuno and Pierluisi pointed out:

International free trade agreements eliminating Puerto Rico’s advantage over low-cost foreign countries as locations for manufacturing for the U.S. market;

Treatment worse than the States in Federal spending programs;

Lack of representation in the making of Federal laws that affect the economy;

and other factors.

Medina did, however, point out that the Federal government purchases far less in the territory than it does in the States — also a consequence of not having votes in Congress and the election of the president of the United States.

And the commonwealthers did not mention that repeated efforts to replace the 936 tax break with a similar tax cut had been repeatedly rejected by Federal officials in Congress, the White House, and the U.S. Treasury Department.

PRFAA Director Hernandez wrote that the “consequences” of the 936 phase out included “tens of thousands of U.S. jobs lost.” His father said that “had the unintended consequence of adding thousands of Puerto Ricans to the welfare [program] rolls … as well as the migration of hundreds of thousands of Puerto Ricans to the United States.”

They did not mention the equivalent job losses, Federal program costs, and migration within the States coming from the movement of manufacturing from the States to foreign countries.

Ex-Governor Hernandez, additionally asserted that “the derogation of Section 936 … failed to raise the projected revenue” for the U.S and was done with the support of statehooders” — perpetuating “Commonwealth” party myths as to why the tax code section was repealed.

In reality, one primary reason for the repeal was that companies were abusing the tax credit by attributing to Puerto Rico income really due to the development of patents and trademarks in the States. This enabled the corporations to avoid much more in taxes than Puerto Rico was obtaining in employment and other economic benefits. In some cases, companies were avoiding hundreds of thousands of dollars in taxes for each job in Puerto Rico paying tens of thousands of dollars.

The other primary reason for the repeal was that voting members of Congress — representing the States — did not want there to be a greater tax incentive to manufacture in the Commonwealth than in the States.

And faced with an overwhelming sentiment in Congress for repeal, statehood party Governor Pedro Rossello and Resident Commissioner Carlos Romero Barcelo (D) actually sought to preserve the tax benefits to the extent of equal benefits for Puerto Rico’s economy.

PRFAA Director Hernandez said that the Federal tax revenues expected from the repeal went to foreign countries instead. In fact, companies avoided almost any further taxation of the income by keeping it in the names of Puerto Rico subsidiaries they established.

Ex-Governor Hernandez, who remains the leading influence on ideas of a “Commonwealth” political status in the “Commonwealth” party, further revealed the partisan and political status motivations for the effort to recreate Section 936.

He would have the tax savings for companies be developed for what would officially be a “Commonwealth Zone” — effectively creating a “Commonwealth” tax status.

He also noted that the lower taxation would not be constitutionally possible in a State, saying that the “constitutional design of the Commmonwealth, which is different from the States of the Union … gives more flexibility for appropriate policies for Puerto Rico.”

“Commonwealth” is a word in the name of Puerto Rico’s local government, not its political status under the constitutions of the U.S. or Puerto Rico. The constitutional design of Puerto Rico, instead, is territory not incorporated into the United States. This status gives Congress broad latitude to govern the territory, exempting it from taxes that must apply equally in the States but also treating it worse than the States in Federal spending and tax credit programs. Territory status also denies Puerto Rico votes in the government that makes its national laws and ultimately governs its local laws: the Federal government.

In a plebiscite in November 2012, Puerto Ricans rejected unincorporated territory status by 54% and chose statehood among the alternatives by 61.2%.